Published 4:00 am, Thursday, May 8, 2003

Photo: MICHAEL MALONEY

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State Treasurer Phil held a press conference outside Danville's Sycamore Valley Elementary School launching a statewide drive to save school funding from budget cuts. With him were a small group of educaters and parents.
CHRONICLE PHOTO BY MICHAEL MALONEY ALSO RAN 03/05/03 less

TREASURER1-C-13FEB03-MT-MJM
State Treasurer Phil held a press conference outside Danville's Sycamore Valley Elementary School launching a statewide drive to save school funding from budget cuts. With him were ... more

State Treasurer Phil Angelides is set to propose today that the new set of investment banking standards laid out in the $1.4 billion Wall Street legal settlement last week be applied to any securities firm that does business with California.

The settlement with 10 of Wall Street's biggest investment banks creates a framework of reforms intended to protect the independence of stock analysts, who are supposed to provide unbiased investment advice to brokerage clients.

An investigation by several state and regulatory agencies, led by New York Attorney General Eliot Spitzer, found that investment bank analysts routinely championed the stocks of firms that were investment banking clients, even as they harbored private doubts about their viability.

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With his proposal, Angelides, who has opened an exploratory committee to assess his gubernatorial prospects in 2006, is tapping into a vein of investor and voter wrath over corporate corruption and the stock market collapse -- as well as revelations that analysts had little faith in the stocks they were touting to the public.

Spitzer will join Angelides via teleconference when the reform effort is announced today.

As California state treasurer and a member of the board of directors of the California Public Employees' Retirement System -- the nation's largest pension fund -- Angelides has been crusading for corporate governance reforms and other investment standards.

In March, he began a share holder campaign through CalPERS to pressure U.S. companies that moved their headquarters offshore to avoid taxes to return to the United States.

The first test, against the management of Stanley Works, did not get shareholder approval.

The primary reforms in the settlement require that analysts not receive any compensation from investment banking revenue, that their jobs remain completely independent from the banking side and that banks no longer hold out the promise of favorable research coverage in an effort to win investment banking business.

While the legal settlement will apply only to the 10 banks that signed it, Angelides wants it to apply to the more than 100 banks that do business with the state. There has been some talk in Washington of extending the new standards to all securities firms, but no rules have been set.

Essentially, the state will tell investment banks, "What those guys gotta do, you gotta do," said Angelides spokesman Mitchel Benson.

For investment banks, the stakes are huge. California did at least $170 billion in financing business last year, through both fund investment and bond issues, creating tens if not hundreds of millions in fees for investment banks.

The move may have some negative consequences, too: With the state mired in a budget deficit as high as $35 billion, it is turning to Wall Street for help.

This week, a passel of Wall Street bankers arrived in Sacramento to offer advice on how the state can both cut and grow its way out of the budget crisis.

It also might have to turn to Wall Street for financing if cash runs short, which by some estimates could happen as early as this summer.